Bigger is better for mortgagees

They’re supposed to be keeping the big banks honest, but smaller, regional lenders have been forced to withhold a larger part of the Reserve Bank of Australia’s interest rate cuts from their customers than many of their big four rivals.

The moves by Bank of Queensland and Bendigo and Adelaide Bank mean their standard home loan interest rates are now more expensive than most of the bigger lenders, raising questions about the level of competition in the mortgage market.

“Wasn’t the government saying they [regional banks] were the ones that were going to add competition?" BBY Financial analyst Brett Le Mesurier asked.

“But of course that was never going to happen because of the disadvantages that they have."

After the RBA cut the official cash rate by 0.50 of a percentage point last week,
Bank of Queensland
and
Bendigo and Adelaide Bank
lowered their home loan rates by 0.35 of a percentage point. That’s less than
Commonwealth Bank of Australia
, which cut by 0.40 of a percentage point and
Westpac Banking Corp
, which reduced its rate by 0.37 of a percentage point, while
Australia and New Zealand
Banking Group will announce its decision later this week. Of the major banks, only
National Australia Bank
has held back more than the two regional lenders, passing on just 0.32 of a percentage point to customers.

However, NAB’s standard variable rate remains the cheapest of the banks at 6.99 per cent. This compares with 7.10 per cent at Bendigo and 7.11 per cent at BoQ. CBA’s standard variable rate stands at 7.01 per cent, while Westpac charges 7.09 per cent. ANZ’s variable rate is 7.42 per cent, but this will change on Friday when it unveils how much of the RBA’s cut it will pass on.

BoQ chief Stuart Grimshaw blamed “increased competition in retail term deposits" for holding back interest rate cuts from customers, while Bendigo boss
Mike Hirst
said the bank had to balance the needs of borrowers and depositors.

While Bendigo and BoQ have not been as kind to home loan customers, savers have been the winners as both banks have lowered the interest rates they pay on deposits by less than the RBA cut over the past week.

Related Quotes

Company Profile

Analysts said regional lenders had been hit by the higher savings rates they have to pay to lure deposit customers, forcing them to try to claw this back from home loan borrowers. “I think in the current environment, the regional banks are not necessarily the players that will be able to reduce their [lending] rates," Nomura analyst Victor German said. “As we look out into the next couple of years, there is nothing obvious in the pipeline that would change that dynamic [of high deposit pricing]."

Bendigo relies on deposits from customers for 77 per cent of the funds it needs to lend to borrowers, while the equivalent figure at BoQ is 57 per cent. Deposit interest rates have increased by about 0.25 of a percentage point relative to the official cash rate since mid-2011 as banks compete aggressively for the money so they can borrow less from volatile financing markets.

“Most of the funding pressure is coming from deposits and these two banks are more deposit funded," Mr German said. “Given the pressure that banks as an industry are under, those two banks would have greater funding pressure than the majors."

Mr Le Mesurier said regional lenders were coming up against stiff competition for depositors. “Basically, the regional banks need to pay up more for deposits and if they are going to maintain their margins, they need to keep back more [from home loan customers]," he said. “Depositors seem to favour the major banks, so the regionals tend to have to pay a bit more."